You might have come across terms like income tax or corporate tax or even service tax. But have you ever heard of the term Carbon tax?
What is a carbon tax?
As you might be aware, all of our activities usually result in carbon emissions. It could be through our daily activities like having food or the activities carried out in the buildings we operate from like the work we do.
Depending on the activity and resource used for it, the emissions could be high or low but there is an associated carbon emission with everything we interact with.
This emission is what the governments across the world want to charge as a tax. But why?
With Climate Change, governments across the world are taking a serious note on the materials that result in emissions.
One way you might have already been reducing emissions in the transport sector is by encouraging EVs and public transport and reducing the reliance on fossil fuels.
However, there is another form of emission called embodied emissions.
These emissions result from the preparation or processing of a certain material. Left unchecked, this could affect your end product. For example, although the EVs don’t emit much during the running of the vehicle, they could have emitted a lot during the manufacturing of their body or batteries.
Hence, few governments worldwide felt the best way to penalize such actions and save the environment would be to charge a tax on it.
EU, for instance, introduced something called ETS (Emission Trading System) in 2005. Along similar lines, India also has a scheme called PAT (Perform, Achieve, Trade). Both use market mechanisms to reduce emissions and improve energy efficiency, but they have different purposes and eligibility requirements
As you might have guessed by now, emissions are traded here. And how? There were certain sectors notified to reduce their emissions by certain units. Each such unit has generated a certificate. Now, the industries which couldn’t meet the minimum limit had to buy certificates from the industries that were able to achieve the minimum limit and more. And each year, the minimum emission limit keeps decreasing. So, industries are given some time to transition but at the same time have gained by deploying certain emission-reducing procedures in the short term.
Although certain material manufacturers have been limited to their emissions in the EU, their clients started sourcing their materials like Steel from South Korea, India or China where the cost per ton is lower but also the emissions are high.
And EU eventually took notice of it.
And this is what leads to the carbon tax.
“There should be a certain way to tax the polluting methods resulting in cheaper material”, is the way some governments have understood and that’s how Carbon tax was coined.
They would evaluate the embedded emission of the imported material based on the emission reporting done by the importer as per the global standards and then decide the tax based on the carbon emitted during the production of such material.
This eventually led to Europe’s carbon tax pressure on India
EU is an important export market for Indian steel manufacturers. India was the second-largest exporter of steel to the EU in 2023, standing at 3 million tonnes, slightly behind South Korea’s 3.2 million tonnes.
But Indian steel mills lagged the South Koreans in terms of emissions with an average of 2.55 tonnes of carbon dioxide put in the air to make every tonne of steel. In comparison, Korean steelmakers emitted an average of 1.6 tonnes of CO2 for every tonne of steel, as per data from BigMint, a market intelligence firm.
That’s not the end.
With the introduction of the Carbon Tax by EU, Indian steel and other metal companies are rushing to secure renewable energy deals to reduce their net carbon emissions to avoid such penalizing taxes.
Such a tax system is not just limited to EU. Countries across the world like Canada, Japan, Mexico have been doing it to certain extent as well.
Even India has a carbon tax too. The country started penalizing coal imports in 2010, with the latest one being INR 400 per tonne of coal.
